Transcript of a Press Conference by International Monetary and Financial Committee Chairman and Egyptian Finance Minister Youssef Boutros-Ghali with International Monetary Fund Managing Director Dominique Strauss-Kahn, IMF First Deputy Managing Director John Lipsky and IMF External Relations Director Caroline Atkinson
April 25, 2009April 25, 2009
|Webcast of the press briefing|
MR. STRAUSS-KAHN: Let me give you a quick overview under the control of the IMFC Chair of what has been going on since yesterday, and especially today.
First, the Fund has been given its assessment of the current situation, which you know already so I'm not going to elaborate too much, on forecasts and on the downside risks, but also on the optimistic part of it, which is if everything goes well, we're still on the hypothesis of a recovery in the first semester of 2010. And more than that, a lot of discussion took place at the breakfast this morning, and in the formal session of the IMFC, but also in the lobby, which is an important part of this kind of meeting, about the policies. And, I think now really there is general agreement on at least two points.
The third one is more of a challenge.
The first point on which I think there is total agreement is that what is needed to be done as far as fiscal stimulus is concerned has been done, and it was accurate to do it, that the Fund was right, as early as January 2008 in asking for this stimulus. And, I think there is no one any more saying that, finally, the amount of stimulus is useful or not.
At the same time what is also behind us is a discussion which was childish, we did 0.1 more than others and others did 0.1 less. All of this is behind us. And I think everybody is now happy, at least for 2009, with what has been done in terms of fiscal stimulus. That is good, because that is part of the green light for tomorrow. As Mr. Blanchard explained already to you during the press conference and did explain this morning at the IMFC, we really face two different kinds of forces, some going downwards, some going upwards, and the forces going upwards are mainly, not only but mainly, the effect of the stimulus packages. So, the fact that everybody now has a correct appraisal of this, these stimulus packages is a good thing.
The second thing on which everybody agrees is the absolute necessity of the cleansing of the financial sector. Again, this has been challenged during the past month, some saying we already did enough, some others saying no, we should go further. Now I think things have been made clear in what has been done, in explaining no systemic institution will be allowed to fail, and that states, the different governments are committed to maintaining an activity, all systemic institutions, something which is fine and a lot of money has been devoted to this either in recapitalization or guarantees or doing different kind of techniques.
The second point is, obviously it is not enough to allow the credit flows to resume. And, I think that this point was made clear also today, the two days, yesterday, at the G-7, the G-20 and also today.
And so, on the second point, the cleansing of the balance sheet, I think everybody again agrees with, by the way, what the Fund has been saying for months, that it is needed to recapitalize, may be needed in some countries to nationalize some institutions, for some other countries to build a good bank, bad bank system, and other countries to do something else, and to do it now, and that recovery is heavily reliant on that. I made the point very strongly this morning, and nobody around the table challenged it. So I think that this meeting, from this point of view, is very useful because all the ministers go back committed to speed up the process.
The point on which there may be a different view and we still need to discuss are the exit strategies. Some of us, including the Fund, are arguing that, well, the stimulus was necessary, of course the Fund is not going to say something different. But at the same time, we need to have a view of what is going to happen in three years, four years from now and to prepare the framework for the exit strategy from the stimulus process. Some others say it is a very important thing, but now we first need to get out of the crisis. We will discuss the question a bit later on. That is a matter of discussion which has not many implications today, but will still be going forward arguing that from our point of view, the exit strategy has to be taken into account as soon as possible.
And, well, I do believe that as far as the topics after awhile of discussion, we will be able to have everybody on this same thing.
Now, the second thing, which is important, is that the sentence that you may have noticed in the G-20 communiqué in London, maybe not, which is very important for us, has been emphasized today, which is the sentence asking the Fund to assess regularly the action taken and the action to take, which puts the Fund really at the center of the coordination process of the economic policy. So, it has been said, it is not totally news because the new thing was in the G-20 communiqué, but some of the things in the G-20 communiqué that finally this part, which maybe was one of the most important parts, after the tripling of resources and things like that, but this small sentence, which is very important, did not attract a lot of attention. So, that is why I'm underlining it now. For us and for the strategy of the Fund, and what the Fund has to do, as a lending institution, certainly, but not only as a lending institution, also, as being one of the main elements of policy coordination, and that is the meaning of multilateralism at the end of the day. This sentence was very important, and I'm very happy that it has been emphasized again today.
Of course, we worked a lot especially during lunch on Fund resources. Because on the formal point of view, it was necessary for the IMFC to endorse the increase of $500 billion because it was the G-20, which is a kind of ad hoc body, of course, heads of state and heads of government representing 80 percent of the voting power in the Fund, but nevertheless we needed to have a decision by our own institution. Of course, this decision has been made, but also the way it is going to go on, all this has been discussed. And I think now everybody has a clear idea of the process, bilateral agreement first, and then the NAB as soon as the NAB will be created.
We had also a discussion on low-income countries and the $6 billion of concessional fund will that we committed to provide. I reaffirmed to the IMFC that we are not only willing, of course, but able to do it, and that this work is under way. But, that is not the end of it. Because, we will do that, but at the same time we still don't have finished in reforming our facilities concerning the LICs, and so in the coming weeks we still will have some streamlining, simplification, and I think increasing effectiveness of our toolkit concerning low-income countries.
As I told you, the SDR program is launched. It is a difficult operation. Not that difficult, but the last time it happened was 1981, so it was necessary to refresh memories. And the last point, which is very important, two last points, one is the vulnerability exercise on which the Fund is now investing a lot of resources. I present a dry run this morning. John Lipsky presented a dry run this morning at the breakfast. The methodology, how we can do this kind of vulnerability exercise, not only for emerging and low-income countries, but also for advanced economies. And I think that we received some comments, sometimes some criticism. We are going to take this on board and we will improve the process that I really think, but at least that was my perception of the reaction of the members at the breakfast, that they were very much interested by this exercise and the real exercise, that will take place later, trying to assess risks, and see what has to be done to avoid this risk to materialize.
The last point, of course, is that we reiterate the commitment to speed up the process on quota and voice, and to start the work adapting the formula to new situations so that for January, 2011, that has been announced, a new round of quota formula could be done.
MS. ATKINSON: Maybe I can ask the Chairman of the IMFC, Mr. Boutros-Ghali, to have a few words.
MR. BOUTROS-GHALI: Thank you very much. Let me give you the gist of the meeting of the membership.
There is agreement that now we can say there is a break in the clouds. We were in the middle of an unprecedented economic storm, but we see a break in the clouds. There are improvements in market sentiment. There are qualitative indicators that show some improvement. Of course, there are still downside risks. Things will continue looking negative for awhile. But, at a lesser and lesser pace.
As the Managing Director said, there seems to be agreement that toward the end of this year we should start seeing the light. We should start seeing movement toward stabilization and then recovery in the end of the first half of next year.
In the face of such a storm we all came to the conclusion that we have responded with unprecedented coordinated action. And, ministers have noted this, have emphasized it. They have emphasized the fact that they are willing to take additional measures if such measures will be needed. Both on the fiscal, monetary, and on the financial side for the recapitalization of their financial system.
The scale of action that has been discussed this morning, the measures that have been outlined by various ministers, are unprecedented, and everybody noted that they were of an unprecedented volume. Again, we are seeing a break in the clouds. We are seeing improvements that are beginning to appear on all fronts.
We have addressed commendation, very strong commendation to the Managing Director for his swift action at bringing forward additional resources to the IMF, at bringing forward the changes in the instruments with which the IMF lends to various countries. The institution of a new instrument that, because it is more adapted to present circumstances, because it is more adapted to present developments, has seen immediately countries flock to it. We have also noted that changes are beginning to be drafted in various fora regarding the way we operate, the way the Fund addresses itself to low-income countries, for not only increasing the amounts of money they can borrow, but also starting to look at the conditions at which they borrow and the instruments with which they borrow. All of this work was done in a very short time, and the membership praised the Managing Director for his work, and for the speed with which he has moved. We looked, also, not only into addressing the issue of the crisis today, and the measures that we need to take today, but also in the institution that drafts these measures that brings forward these amounts of money. We looked at not only the instruments that it uses, one of them being the vulnerability exercise, which is an instrument that is going to make use of the Fund, the IMF's strengths in looking at different countries at the same time, simultaneously, at making linkages that various markets often do not make.
Also, upgrading the way the Fund is governed, the way the membership interacts with each other, interacts with the various instruments at its disposal, interacts with the world economy at large. This is going to be a lengthy process. At the heart of it is reforms in quotas and the various weights of different countries. But, ultimately, it is going to lead to the creation or the evolution of the IMF into an institution that is much more in tune with the 21st century and much more in tune with addressing the problems of the 21st century, and the fact that when we have a crisis now, it is no longer relegated to a small corner of the world, it is a crisis that covers all countries involved.
On the whole, the impression I got from the membership's discussion and my discussion with various ministers is that we have serious problems. We are taking very serious measures, but things are beginning to look up. Carefully, cautiously, we can say there is a break in the clouds.
MS. ATKINSON: I'll open up to questions.
QUESTION: Mr. Strauss-Kahn, the British government has forecast a very rapid rebound in the U.K. economy from minus 3.5 percent this year to growth of 1.25 percent next year, and then 3.5 percent after that. The Fund has made much more negative forecasts with a continued decline next year. Are the U.K. forecasts remotely credible, and doesn't it damage the Fund's surveillance exercises and the effectiveness of that surveillance if governments around the world don't heed the realistic assessments that your organization is making?
Secondly, if I could also ask, there is talk of Britain potentially ultimately needing IMF support, but doubts over whether it could meet the criteria for, for example, the FCL, since these include criteria like sound public finances and sustainable public debt, and an absence of bank solvency problems.
Would Britain qualify for IMF support in that sense?
MR. STRAUSS-KAHN: Forecasts are very difficult these days. And, the usefulness, of course, of forecasts is not only in the level of the forecast but the way the forecast changes over time. We will certainly have more pessimistic forecasts than most governments. Last year, we have been proven right, but it doesn't mean we will be always right. What is important in the new set of forecasts is not that much the level of the forecast, but the fact that we see a deterioration since the last set of forecasts, last October. So, that is the important thing. The level of forecast depends very much upon the different hypothesis. Of course, I will support the hypothesis made by the Fund, but I can understand that many other players may have other kinds of hypothesis. Moreover, part of the rebound, part of the recovery, relies on confidence, and it is absolutely normal that governments all over the world will try to rebuild confidence in looking at the upper part of the range rather than the lower part. Because it is part of the process itself. So it helps to rebuild confidence and it helps for growth. I do understand that most governments have a forecast which is better than ours, and I hope that finally they will be right.
Now, on your other question of the FCL, we only answer to governments when they talk to us about these things. So, if you are talking about on behalf of your government, I would be happy to see you after. If not, I am afraid I can't answer to you.
QUESTION: Mr. Strauss-Kahn, I want to ask you what you believe at this point would be an appropriate level of fiscal stimulus for 2010. As you mentioned in your remarks this there is now a degree of consensus as to what is appropriate for this year, but what would be appropriate for next?
MR. STRAUSS-KAHN: It is very difficult to answer to you, and that is why we will wait for answering this kind of question because it depends a lot on the effectiveness of the stimulus of 2009. So, it is difficult to define what is the need, what will be the need for 2010 before having really an assessment on the results of what is done in 2009.
So, why is it difficult to have an assessment on the results of 2009? Because in turn it depends on the efforts which will be made on the cleansing of the balance sheet, as I said before. So, all this is bound. If what we ask and what we think is necessary, as an effort on the side of the banking sector, is done, then the results after stimulus in 2009 will be very big and then probably what is already forecast as a stimulus for 2010 may be enough. In other cases, it would need more. So, it is almost impossible to answer to you at this point in time.
QUESTION: (Interpreted) Question for you, Mr. Strauss-Kahn. Can you answer in French?
G-7 ministers, do they consider all of the methodologies for the IMF as losses? Can you tell us what happened today? Are you envisaging changing your methodology?
MR. STRAUSS-KAHN: (Interpreted) I will answer you in French, and then I will repeat in English. So I will be quick.
This methodology has been in place for a year. It has produced the first billion we announced for assets in banks, and new assets have become toxic because of the economic slowdown. So, 1.4 to 2.2 in January, and now 2.7. And then the expansion, not issued, but produced. But, there are hypotheses in the way these assets came to term because what you are measuring now is the potential loss today. A lot of these assets will go through to their term. And, losses will be less severe.
Think of the Swedish banks. There were enormous losses, creation of a bank fund, and they were profitable. There are lots of hypotheses, and you can conceive different methodologies. We look ours because it has the advantage of having a chronological series and as with everything in forecasts, it is the evolution which is important.
(In English) The methodology we use?
It is a nice situation when you at the same time can ask the question and give the answer.
The question is the following:
Many ministers did criticize the figures we released on the total amount of potential losses in the financial sector; so what was the discussion about that? What do we think about that.
And I answered that, the methodology we use is the same we use one year ago when we released the first figure of $1 billion, which then increased to 1.4 trillion, 2.2 in January, and 2.7 today, increasing because there is a new kind of impaired asset. As economies slowed down, there were assets which were not impaired before which become toxic assets, so it is absolutely normal that this amount increases.
What is important is the speed at which it increases. And, of course, there may be a lot of hypothesis underlying these figures, including the way you take into account that these assets can be held until maturity or not. It is potential losses. And at the end of the day some of those assets may not present any kind of loss because they would be held to maturity and then sold at the correct prices.
I was just quoting the very well-known Swedish experience where the bank had the large loss, creation of the bad bank took the losses out of the balance sheets of the bank. And the bottom line, a couple of years later, is that the bad bank made a profit because the different assets recovered their value. And when they sold it, they made some profit.
At one point in time you may have one estimate of the loss, and then it may change over time. This relies on a lot of hypothesis on the valuation and so on. Perfectly normal that some other institutions or countries, or whatever, may have other measurement.
What is interesting, again, as I said for forecast, is the way it goes over time. We now have a time series of this, at least four points, the fact that it increased more rapidly, not that rapidly, shows how the crisis goes. That is the most important thing, more than the absolute value of the figures, which relies on perfectly well-known hypothesis. Nothing is hidden like this, but one may choose other kinds of hypothesis.
MR. LIPSKY: I would like to add one word about this, because it lends itself to confusion.
Those figures refer to write downs of assets, at the same time banks are making profits on their current income. So, the whole picture is much more complex to come up with a figure about what the implication is for the results of the actual banks, what they might need for recapitalization, etcetera. In other words, what we were just estimating was the write-downs from existing assets that will be compensated at least in part by other activities of the bank.
QUESTION: Could you expand a little bit on the disagreements over the exit strategy, and specifically what were the European and the American positions on that?
MR. STRAUSS-KAHN: What I said about exit strategy? Unfortunately, it is not the Europeans on the one side and the Americans on the other. That would be too easy. I wouldn't say it is a disagreement about strategy. It is just different a way to put on the urgency of getting rid of the crisis today, and others having more in mind that we have to do that, of course, but at the same time taking into account what is going to happen looking forward. So it is not so much a difference in strategy. It is a different appreciation of the urgency. Those who think that, well, things are improving, that finally we have more green light than red light, may say, okay, it is time to think about exit strategy. Some others, more concerned by the depth of the crisis today, say, okay, certainly we will need to talk about exit strategy, but first let's talk about today.
I wouldn't say it is different strategy, but the length of the horizon to which they are looking. You shouldn't emphasize too much on this. I was just trying to find a point of disagreement, because now everybody agrees on the stimulus and everybody agrees on the cleansing of the balance sheets, so I was desperately looking for something ministers may not be exactly of the same opinion, and I found this. But don't believe that this is a big fight against America, or whatever, or Europeans on the other side. It is mixed, and it depends on the way people feel about the current situation.
QUESTION: This morning the Tanzania minister of finance disclosed that they have reached an agreement with the IMF for some stimulus band, depending on whether he discusses it with his government first before disclosing it to the press. I wonder if you could possibly let us know whether indeed you have reached an agreement with the Tanzania government? And also, have you identified other African countries that will be receiving stimulus plan?
MR. STRAUSS-KAHN: What is interesting in this discussion with the Tanzania government is that it shows that what we said since the beginning that there is some room for fiscal stimulus everywhere; some countries can, some countries can't. But it is not that we are arguing that advanced economies should have a deficit, could, can allow a deficit to have stimulus, and that other countries should tighten their belt. Some countries, including in Africa, when they had in the past policy creating some fiscal room, may have this kind of stimulus policy. And that is the case of Tanzania. I'm very happy having had this discussion with the Tanzanians, not the only one in Africa, showing that African countries may have had during the last years good policy in place, and have some fiscal room. Unfortunately, there is also a lot of African countries having just a balanced situation which may be hard hit by the crisis, and not having room enough for fiscal stimulus. Some good examples like Tanzania should be put in the headlines.
MR. BOUTROS-GHALI: Egypt is among African countries that have had good economic policies over the past four or five years and has fiscal room, and has engaged in fiscal stimulus that is taking care of the fallout of the crisis on the Egyptian economy. So, again, I second what the Managing Director said. The fact that African countries are low-income countries doesn't mean they don't have some room for maneuver and some good policies that they can make use of.
QUESTION: On Thursday, you held a press conference and suggested to read over the new guidelines for emerging countries, especially central European and Eastern European countries. I did it, I read it over, and I was a bit shocked to see that the IMF suggests such flexible monetary easing and credit easing, American-style easing, and I couldn't believe my eyes. Do you really believe that all these methods, printing money is good for emerging countries, or not? And where are the limits of the flexibility of the IMF? Let me see the example of Latvia and Ukraine, where you had some difficulties?
MR. STRAUSS-KAHN: I will let John say a few more words than I will about Hungary, but we really are in new times, no? I like this.
The problem is the cost of doing nothing, higher or lower than the cost of taking some risk, including in monetary policy. And our judgment, not in all countries, depends upon the country, is that sometimes the cost of doing nothing, the cost of too big a slowdown in economic growth is higher than the cost which is exists. There is no policy without a cost. Than the cost of easing either fiscal policy or monetary policy, depending on the situation.
But maybe, John, you want to make more comments about that.
MR. LIPSKY: About Hungary, that is a country in a situation in which it was in the midst of a fiscal adjustment, difficult region, and it is reaching an agreement with the Fund last year, rather substantial agreement of adjustment supported by the Fund, by the European, by the European community and by others, its neighbors, to help provide the resources in a difficult period for the Hungarian economy, trying to find a good balance between maintaining fiscal discipline and creating confidence in the medium-term prospects of regaining good balance in that economy, while supporting growth. Similarly, on the side of monetary policy, a country following an appropriately following a floating exchange rate policy, that monetary policy has to thread the needle between maintaining domestic stability, supporting growth, and helping maintain external stability.
It is a very challenging moment, but in a difficult time, you may be aware that we recently had our first review of that arrangement, and were able to move forward with some additional funding for the Hungarian economy. We're hopeful in a difficult time that we can provide adequate support.
QUESTION: About the note insurance, have you decided the interest rates on the balance and will that add up the borrowers cost, borrowing money? And, also, how many countries besides China, Brazil and Russia have expressed interest in buying the bonds?
MR. STRAUSS-KAHN: The interest rate will be the interest rate of the SDR. It is moving every day. It is rather low today because as you know it is an average of the different currencies being in the SDR: Dollar, euro, yen, and sterling. So, this average gives a rate of the SDR which moves over time. So, nobody can say what will be the interest rate in three months or in five years, three months probably will not be so high, but in one year, two years, nobody knows, that is the rate that comes from market rates.
As you mentioned, I don't know where you get this information, but you got it, China, some other countries have expressed interest in this kind of vehicle. Not the only one. But until we will have a real commitment, I prefer not to say too much. I'm sure that this vehicle will be used, provides flexibility. And, it is interesting for many countries, so we just passed the template of the standard form of the agreement, the Board, we discussed this, and now we are discussing with the different creditors the way to implement, the amount they will put in. But, there will be quite a bit of them.
MS. ATKINSON: Thanks very much.
If I can just wish the Managing Director a happy birthday. It is his birthday today.
MR. STRAUSS-KAHN: Thank you.